CACI Beefs Up Networking Capability With Acquisition

By Nick Wakeman, Senior EditorWith its latest acquisition, CACI International Inc. of Arlington, Va., continues its march toward becoming a major player in the network management market.While still strong in its traditional business of software development, systems integration and simulation services, CACI has built through a series of acquisitions a strong network management business that now accounts for about 25 percent of the company's $490 million in annual revenue.CACI's newest deal is for N.E.T. Federal, the government services division of Net.com, formerly Network Technologies Inc. of Fremont, Calif. The acquisition, which is expected to close by early December, will bring CACI another $50 million in annual revenue and more network management capabilities.CACI is paying $25 million in cash for N.E.T. Federal, but the price tag could grow by another $15 million over the next year if certain milestones are met. Net.com also could reap another $10 million over the next five years through royalties."This brings us new customer sets and a broader footprint of capabilities in managed network services," said J.P. "Jack" London, CACI chairman and chief executive.N.E.T. Federal customers are primarily among the defense and intelligence agencies. The division has about 185 employees, with 90 percent of those having secret or top-secret clearances. The division provides services such as network engineering and design, implementation, installation and integration, as well as network maintenance and management. "This [acquisition] expands our business presence and moves us further up the scale of service providers," London said.CACI began building its network services business in 1996 when it acquired IMS Technologies Inc. of Rockville, Md. In 1997, CACI acquired Government Systems Inc. of Chantilly, Va. In August, the company bought Century Technology Inc. of Silver Spring, Md.The deal for N.E.T. Federal is "very consistent with their strategy of building their network management services business," said William Loomis, a managing director of the investment banking firm Legg Mason Wood Walker Inc. of Baltimore.The move to go after the networking business has been paying off for CACI, London said. The company has won contracts to manage networks for the Federal Aviation Administration, the Air Force and the Coast Guard.In December 1999, the company opened what it calls the Vision & Solution Center in Chantilly, Va. The center consolidated CACI's network and communications capabilities and allows the company to manage networks for customers as well as design and demonstrate networking solutions.The company also has made other acquisitions in recent years that have built its capabilities in systems integration, intelligence work, information assurance and electronic commerce."It's been quite a transformation," London said.Since 1995, the company's revenue nearly doubled, rising from about $250 million to $490.5 million in 2000. London said he wants revenue to double again and hit $1 billion in 2005.That goal is achievable, Loomis said. "The challenge is going to be adding revenue at [operating] margins that are at or above current levels," he said.For its fiscal 2000, which ended June 30, CACI's margin was 6.6 percent compared to 6.5 percent a year earlier. In its first quarter of fiscal 2001, which ended Sept. 30, the company's margin fell off to 6.2 percent.London said the drop was because of investments the company made in the electronic commerce space. The company's margins should rise during the fiscal year and could exceed the 2000 level, he said.Improving the company's margins was one of London's goals coming out of last year's annual meeting where dissenting shareholders lost a bid to win seats on CACI's board and force a sale of the company."I think CACI is very aware how important profitability is," Loomis said.The financial structure of the N.E.T. Federal deal, with its incentive clauses, should pay off well for CACI, Loomis said.Without the incentives, the deal would have been too expensive, Loomis said. "I liked the structure a lot," he said.CACI is paying $25 million in cash at the time of closing, London said. The additional $15 million will be paid a year later, but only if milestones such as migrating certain contracts and winning a major recompete are met, he said.London declined to name the contracts involved.The royalty payments, worth another $10 million, come into play if there are successful sales of Net.com networking products to the government, he said.The structure of the deal also helps CACI because not as much money needs to be borrowed to make the deal, London said.Net.com intends to continuing selling its networking equipment to the government, and CACI is in the process of forming an alliance with Net.com to provide services for Net.com's products, London said."We are getting a good relationship with a network product provider," he said. XXXSPLITXXX-XXXSPLITXXX-